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In our intellectual property valuation practice, we are often asked by patentees how they can get a proverbial back-of-the-envelope assessment of the value of their patents. What at first blush sounds like a reasonable request, its proper answer is not as easy as most would like to think.

In this series of blog posts, I will strive to address the question from a practical perspective. In the end, I believe we shall see that not only is there no simple answer, but the question might not be the right one to begin with.

General Principle No. 1

“A patent has no intrinsic value independently of the value of a business”

At the risk of repeating what must have been replied myriad times by patent attorneys and IP professionals, a patent is only the temporary right to exclude others from a specific market delimited by a written description of an innovation [USPTO Patents Portal]. It does not represent the right to practice an invention, or title to a royalty income stream; several factors are co-determinants of the economic value of the opportunity the patent represents.

For example, if an inventor is issued a patent on an innovation which he/she cannot implement directly and no one else needs such invention to operate their business and satisfy actual consumer demands, then no actual market segment exists for the invention. That patent is not simply worthless, rather it represents a net cost to the patent holder as obtaining a patent in the first place requires one to cover drafting, drawings, filing fees, and other prosecution costs which, realistically, are no less than $1,500 and could be as high as ten times that amount [Current USPTO fees].

By contrast, consider a situation where there is market demand for, e.g., an accessory that props up touchscreen cell phones because: (a) a large number of such cell phones are in use; (b) the phones must be held at an angle for confortable viewing of videos; (c) the cost of manufacturing the accessory is low relative to the phone at the appropriate volume levels. In this case, the value of this limited accessory business would be proportional to the net profits of the venture.

Phone Accessory (www.theGlif.com)

Then, a patent that claims that invention would likely have economic value because the patent holder can exclude others from making, importing, using, and offering for sale, or selling that invention throughout the US and sell the product at a monopoly price. This price would be greater than the competitive price and, thus, the patent holder would effectively be reaping an economic rent: the incremental profit at the monopoly price over the net profit at the competitive price. Only this portion of incremental profit would be attributable to the patent and would therefore be the value of the patent.

Patent Effects on Market Price

Thus, it is because the phone accessory business has value that a patent on the device would have economic value and, furthermore, the value of the patent is different from the value of the underlying business (and always smaller if the business is profitable in a competitive environment).

Consequently, at this initial level of the inquiry, the right question would be closer to: What is the value of the underlying business, and how much can a patent contribute to that business value?

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We shall cover additional principles in the IPmetrics® Blog, and dig deeper into useful tools for estimating the elusive patent values.

Challenges of IP Management

Managing an organization’s IP portfolio is full of challenges in the context of global competition, which turn particularly acute in the current economic dynamics of the turnaround from the financial crisis.

There are a few good information sources on the Best Practices for IP management. The International Trademark Association (INTA) and the World Intellectual Property Organization (WIPO) serve the global community of large companies and SMEs respectively. Something that is often missing, however, is learning from the mistakes of others. This may be because organizational culture has a way of suppressing mistakes from public view, or because emphasis is often placed on the case-specific nature of such problems, rather than abstracting the general lessons from the experience.

In any case, aside from maintaining a current inventory of intangible assets including intellectual property, designing and enforcing quality controls with internal and external publics, IP managers must continually ensure the organization’s IP policies support and advance the company’s mission and strategic directives.

When the latter process goes wrong, most IP managers can learn a valuable lesson. In this post, we address a critical mistake that we witnessed at a corporate restructuring client some years ago, dealing specifically with global IP.

Mistake #1: Saving Money on Maintenance Fees

In the last few years before a Chapter 11 filing was necessary to restructure the business, the subject company’s IP managers had finally inventoried the complete patent portfolio that had accrued in both the USA and Europe as a result of the company’s growth and M&A activity. The key and elusive piece of puzzle was a matrix, cross referencing the individual patents and the specific product lines and respective factories in which they were applied.

Simultaneously, a central piece of the strategy the company’s top management tried to implement was cost savings across non-essential activities.

Armed with their summary matrix, when the harried IP managers decided on their contribution to the cost saving measures, they identified European patent annuities (yearly maintenance fees) as a material target and proceeded to rationalize the portfolio by suggesting to stop paying those maintenance fees on patents in those European jurisdictions were they did not have significant levels of sales (Italy was a big offender).

The problem here was informational. The IP management summary did not clarify that the patents in those jurisdictions were covered manufacturing processes, not end-products. A couple of years later, in the aftermath of the bankruptcy filing, the company negotiated to settle debts of its European subsidiaries while holding on only to the IP, namely the European patents.

The prior mistake reared its head: the manufacturing plants and their advanced technologies were unprotected in several European countries and the assumed European Patent Portfolio was full of holes and phantom patent assets that had lapsed due to unpaid fees. Thus, regardless of any negotiation prowess, the competitive advantages of proprietary technical advances in the manufacturing plants were discounted by the bidders for the plants, and the company could only sell a few disjointed and not very valuable patents that covered final-product features that change very often in the fast paced markets in used to dominate.

Thus, a superficial understanding of the IP inventory gave way to a substantial loss of value for the restructured company. Needless to say, the US operations were liquidated and the European factories were sold for a fraction of the going concern value.